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TMI Blog2023 (6) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not establishing how the Assessing Officer ('AO') committed any error in passing the assessment order dated 24.12.2019 under Section 143(3) of the Act. Therefore, the jurisdiction assumed by the PCIT under Section 263 of the Act is illegal, bad in law, without jurisdiction and liable to be quashed. 3. That the order passed under Section 143(3) of the Act by the AO is neither erroneous nor prejudicial to the interest of the Revenue and as such the impugned order passed by the PCIT under Section 263 of the Act dated 24.03.2022 is illegal and bad in law. 4. That the PCIT failed to appreciate that issue was duly examined during the course of original assessment proceedings and the same was, therefore, outside the scope of revisionary jurisdiction under Section 263 of the Act. The view taken by the AO is a plausible view, hence the order passed under Section 263 is illegal and bad in law. 5. That this is not a case of lack of enquiry as the assessment order dated 24.12.2019 is passed after making the enquiries and after due application of mind. 6. That, during the course of original assessment proceedings, detailed questionnaires were issued from time-to-time which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d considered/appreciated by the PCIT. 15. That, in view of the facts and circumstances of the case and in law, the PCIT has erred in cancelling earlier assessment order dated 24.12.2019 and directing the AO to revise the assessment order in view of findings of the PCIT. The said act of the PCIT is illegal and bad in law. 16. That the observations made are unjust, illegal, arbitrary, bad in law, highly excessive and based on surmise conjecture." 3. Heard the arguments of both the parties and perused the material available on record. 4. Sapien Funds Limited (SFL) is incorporated and registered outside India according to law of Mauritius with permanent establishment in Mauritius and a Tax Residency in Mauritius, the Tax Residence Certificate in this regard has been provided to IT Authorities in India. The registered address of the company is 3rd Floor, 355 NEX, Rue du Savoir Cybercity Ebene 72201, Mauritius. SFL is an independent and distinct corporate legal entity. SFL is managed by Sapien Capital (Mauritius) Limited (SCML). SCML as well as its directors are tax resident of Mauritius. 5. SFL is a Collective Investment Scheme ("CIS"), authorized and regulated by the Financial S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt nor verified the claim of Rs. 12.93 Cr. The ld. CIT held that the AO has not obtained any explanation whatsoever to ascertain the assessee's contention that such income are not chargeable to tax. 10. The summary of the reasons given by the ld. CIT are as under: 1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism. 2. The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries. 3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 4. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company. 5. There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would be identical irrespective of location of funds. 11. After examination of the details and explanation given by the assessee, the ld. PCIT held that the assessee is not entitled to benefit of Article 11 of the India- Mauritius DTAA. Accordingly, the ld. CIT held that the income would be chargeable to tax in India on gross basis at the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IS manager, CIS administrator, Investment adviser or assets manager licensed or approved by the FSC. The exemption applies to the following income: * Foreign dividend, subject to amount not allowed as deduction in source country. * Foreign-source interest income. * Profit attributable to a PE of a resident company in a foreign country. * Foreign-source income derived by a CIS, Closed End Funds, CIS manager, CIS administrator, investment adviser or asset manager licensed or approved by the FSC. * Income derived by companies engaged in ship and aircraft leasing. * Interest derived by a person from money lent through a peerto-peer lending platform operated under a license issued by the FSC. As said before, liability to tax for treaty purposes refers to full or comprehensive liability and not liability that is limited under the domestic law of the relevant contracting state. Therefore, the criteria of "liable to tax" is not fulfilled in this case. In view of the above, the assessee is not a tax resident for the purposes of application of India- Mauritius DTAA. In the instant case, the assessee company is created under Collective Investment Scheme. Collective investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in section 6, in clause (23FE) of section 10 and various agreements entered into under section 90 or section 90A of the Act. Hence, it is proposed to insert clause (29A) to section 2 of the Act providing its definition. The term liable to tax in relation to a person means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided. This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years. The ld. AR further relied on the judgments in the case of Union of India Vs. Azadi Bachao Andolan & Anr. 263 ITR 706, Serco BPO Pvt. Ltd. Vs. AAR 379 ITR 256 and In Re General Electric Pension Trust 280 ITR 425. 23. On going through the entire facts, we find that the observation of the ld. CIT that the assessee company is not entitled to treaty benefits being a non-resident for tax purpose because of non-fulfillment of condition of liable to tax criteria is wrong on facts. Just because, tax exemption is provided by the resident country doesn't give an automatic right t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and they are under no obligation to pass on the income as in the case for agents or nominees. Subsequently, a section on improper use of the convention was added to the Commentary on Article 1." 25. Taking cue from the order of the ld. CIT, the ld. DR argued that in Post BEPS, a new Article 29, concerning the entitlement to tax treaty benefits, was added to the OECD Model as well as the UN model update of 2017. The model article includes several alternative provisions that contracting states may choose from when drafting their tax treaties to ensure that tax treaty benefits are not granted in situations of evasion or avoidance. These provisions reflect the intention of the contracting states as included in the preamble to OECD and UN Model which is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. The intention included in the preamble and the provisions stipulated under Article 29 stem from the work carried out under OECD BEPS initiative and corresponds to the minimum standard as detailed in the Final Report on Article 6 of "Preventing the granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed during the proceedings, two investors were holding more than 10% of shares of the fund. Raj Shah, Sita Shah and Ronak Shah together hold 13.64 % of shares. All of them are tax residents of Kenya. Abhishek Agrawal, a tax resident of the UK held 13.13% of the shareholding. Sapien Capital (Mauritius) Ltd is also the fund manager of this CIV. The moot question is then why the CIV is not formed at the level of the UK or any other place other than Mauritius because whether the investments are made from the UK or Mauritius or any other location, commercial outcome in India would be similar. The only reason is to obtain a favourable tax position of taxation of capital gains under the India-Mauritius as available prior to modification of protocol in 2017. In order to understand the motive, one has to consider the arrangement as a whole instead of resorting to transactional analysis. In this regard, a reference may be made to the principle approved by Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (2012)341 ITR1 (SC). The Apex Court had held that in order to ascertain the taxability of the cross-border transaction in India, the business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us) Ltd. in Mauritius which inturn created Sapien Funds Ltd., a Collective Investment Vehicle. This CIV is registered as FPI in India and made investments in India. Admittedly, there are around 21 investors in the CIV who are tax residents of third countries. The CIVs are created for a limited time frame. Once the investments are disposed of, the proceeds from the investments are completely disbursed to the investors on the basis of their contribution. In fact, the tacit arrangement is to pass on every income to its real owner after deducting expenses for fund management. Therefore, this is completely a back-to-back arrangement. A company may be coined as conduit if the dominion and control over the income is with somebody else. In the instant case, the economic owner of the income is the investors. Therefore, a conduit company would also fail the test of beneficial ownership. It was argued that the TRC is only a first step but it is not a final to accord benefits of the treaty provisions. 31. In nutshell, the revenue argued that this is a classic case of treaty shopping to avoid payment of taxes. Therefore, the company would not be entitled to tax treaty benefits under India-Maur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term "beneficial owner" is intended to address difficulties arising from the use of the words "paid to" in relation to dividends rather than difficulties related to the ownership of the shares of the company paying these dividends. The recipient of o dividend is the "beneficial owner" of that dividend where he has the full right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass the payment received to another person. It was argued that this type of obligation would not include contractual or legal obligations that are not dependent on the receipt of the payment by the direct recipient such as an obligation that is not dependent on the receipt of the payment and which the direct recipient has as a debtor or as a party to financial transactions, or typical distribution obligations of pension schemes and of collective investment vehicles. 36. We find that the circular No. 789 of CBDT reads as under: "734. Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) 1. The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esidency in that contracting state and the Income-tax Authorities in India would not go behind the TRC and question the TRC holder's resident status. For the sake of ready reference, the said Finance Ministry's Clarification is reproduced below: FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) PRESS RELEASE, DATED 1-3-2013 "Concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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